Service tax: Key Development 1 January 2013 CA ABHISHEK A. RASTOGI

Agenda 1 Snapshot – Service tax amendments 2Scheme of Taxation 3 Liability under reverse charge mechanism 4Valuation of Services 5Principles of Interpretation 6Place of Provision of Services 7Point of Taxation 8Other relevant changes 9 Impact on specific transactions 2

3 January 2013 Snapshot – Service tax amendments... Finance Act, 2012 introduced a comprehensive approach to tax services:  All services other than Negative List and exempted services but includes declared services.  ‘Service’ has been defined for the first time. Specified services liable to tax under the reverse charge mechanism:  Joint liability to pay service tax in few cases. Export of services now governed Place of Provision of Services Rules, 2012 (‘POPS Rules’) and Service Tax Rules, 1994 (‘ST Rules’). Amended conditions of export as specified under ST Rules:  the provider of service is located in the taxable territory,  the recipient of service is located outside India,  the service is not a service covered under the Negative List of services.

4 January 2013  the place of provision of the service is outside India (i.e. as per POPS Rules),  the payment for such service has is received in convertible foreign exchange; and  the provider of service and recipient of service are not merely establishments of the same entity (i.e. services are not provided by a branch to a head office). Benefits of export of services  Refund of CENVAT Credit under CENVAT Rules (Under Notification No 27/2012 N.T. Central Excise).  Rebate of excise duty/ service tax paid on inputs and inputs services (Notification No 39/2012 ST). Notification No. 17/ 2011 S.T. for exemption to services provided to SEZ units or Developer of SEZ replaced by Notification No. 40/2012 S.T. Snapshot – Service tax amendments

Scheme of Taxation 5 January2013 Includes declared services Identifying an activity as a service (S. 65B) Not a negative list service Not exempted Determining taxability of the service ( S. 66B) As per Place of Provision of Service Rules Determining whether place of provision of service is in taxable territory (S. 66B) Service provider or Service recipient under reverse charge Identifying person liable to pay tax (S. 68)

Service - Section 65B(44)... Service Means any activity carried out by a person for another for consideration Includes declared services 6 January 2013

Service - Section 65B(44)... Service Excludes mere transfer of title in goods/immovable property mere transaction in money or actionable claim service by employee to an employer fees taken in Court or Tribunal 7 January 2013

Negative List of Services - Section 66D Sector Specific Negative List Miscellaneous Advertisement space /time slots Trading Manufacturing Sector Financial Sector Government / Local Authority Agriculture and Animal Husbandry Entertainment and Amusement Transport Power 8 January 2013

Declared Service - Section 66E Declared Service Renting of immovable property Construction Temporary transfer of IPR Development, etc of software Refrain from, tolerate or do an act Hire, lease, license of goods Finance lease Works contract service Supply of food/drinks 9 January 2013

Liability under Reverse Charge Mechanism January 2013 Specified services liable to tax under the reverse charge mechanism: Specified Services Services provided by an Arbitral Tribunal Services by individual advocate or a firm of advocates Services by Goods Transport Agency Services provided by persons in a non-taxable territory to persons in the taxable territory Sponsorship Services to any body corporate or partnership firm Support services provided by Government / local authority Services by insurance agent to insurance business Services provided by a director of a company Security services

Liability under Reverse Charge Mechanism 11 January 2013 For following services, liability to pay tax on both as under: Service descriptionService Recipient (Body corporate) Service Provider (Individual, firm or LLP) Hiring of motor vehicle designed to carry passengers: (a) With abatement (60%) (b) Without abatement 100% 40% Nil 60% Supply of manpower for any purpose 75%25% Works contract service50%

A few Exemptions... Mega Exemption Notification covering 39 items proposed such as: Description of Service Construction, erection, commissioning or installation of original works pertaining to an airport, port or railways, including monorail or metro Sub contractor providing services by way of works contract to another contractor providing works contract which are exempt Services by way of transfer of a going concern, as a whole or an independent part thereof Job work on specified goods Services with respect to business exhibition held outside India Services by way of collecting or providing news by an independent journalist, Press Trust of India or United News of India. Services by way of vehicle parking to general parking excluding leasing of space to an entity for providing such parking facility Services by specified persons Slide 12 January 2013

Valuation of Services 13 January 2013

Valuation of Services... Service is defined as any activity … for a consideration. ‘Consideration’ not defined – may be derived from Indian Contract Act, 1872 as anything done or abstain from doing. Consideration can therefore, be in monetary / non-monetary terms. Value of taxable service having non-monetary consideration: Slide 14 ParticularsValue of Taxable Service Consideration not wholly or partly consisting of money Value of taxable service shall be the monetary value plus the value derived as per Rule 3 (for unascertainable part of consideration) Consideration is not ascertainable Rule 3 (i)Gross amount charged by the service provider for similar service; or (ii) Equivalent money value of such consideration, not less than the cost of provision of such service January 2013

Valuation of Services... Amendments to the taxable value of service: Slide 15 Value of Taxable Service Includes Amount realised for provision of service beyond period originally contracted Excludes Interest on deposits and delayed payment (Interest on loans included in Negative list) Accidental damages due to unforeseen actions January 2013

Works Contract Works contract services are declared services under section 66E(h) of the Act. Definition covers such contracts which involve transfer of property in goods and are for carrying out the activities in respect of both movable and immovable properties Property in goods should pass on the principle of accretion, accession or blending when the works contract is executed Dominant intention need not be transfer of property Main object should not be to transfer chattel as chattel Slide 16 January 2013

Valuation of Services... Value of service involved in the execution of works contract: -total value of works contract minus actual value of goods, or -percentage of total amount as under, ◦ Total amount includes value of all goods / services supplied free of cost (excluding VAT). Slide 17 Type of works contractTaxable turnover as percentage of total amount For execution of original works40% For execution of original works where the contract value includes the value of land 25% Other works contracts including completion and finishing services 60% January 2013

Valuation of Services... Abatement for select services: Slide 18 Description of ServiceTaxable Portion Condition of non-availment of Cenvat credit Financial leasing services10%NA Transport of goods by rail30%NA Transport of passengers by rail30%NA Transport of passengers by air40%On inputs and capital goods Transport of goods by road by Goods Transport Agency 25%On inputs, capital goods and input services Bundled service by way of supply of food or any other article of human consumption 70%On any goods classifiable under Chapter 1 to 22 of the Central Excise Tariff Act,1985 Renting of hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes 60%On inputs and capital goods Services provided in relation to chit70On inputs, capital goods and input services

Valuation of Services Slide 19 Description of ServiceTaxable Portion Condition of non-availment of Cenvat credit Renting of any motor vehicle to carry passengers 40%On inputs, capital goods and input services Transport of goods in a vessel in India 50%On inputs, capital goods and input services Construction of a complex, building, civil structure or a part thereof 25%On inputs January 2013

Principles of Interpretation 20 January 2013

Principles of Interpretation Reference to a service does not include reference to input service. Service capable of differential treatment on the basis of its description - specific description will prevail over general description. Bundled services are those services which contain elements of one or more services : -If bundled in the ordinary course of business - the description which gives its essential character will prevail. -If bundled not in the ordinary course of business - the service which gives the highest service tax liability will be considered. Slide 21 January 2013

Place of Provision of Services 22 January 2013

Place of Provision of Services 23 The Government notified rules for determining the place of provision of a service effective from 1 July POPS Rules replace the current Export Rules / Import Rules. Place of provision of service to be determined on the basis of the following : Rule NoRulesPlace of Provision of Service Rule 3Default RuleLocation of service receiver If location of service receiver is not determinable location of the service provider Rule 4Performance based serviceLocation where the services are actually performed Rule 5Immovable property based service Location of immovable property January 2013

Place of Provision of Services 24 Rule NoRulesPlace of Provision of Service Rule 6Services related to eventsPlace where event is actually held Rule 7Services provided in more than one location Location in taxable territory where greatest proportion is provided Rule 8Services where the provider as well as the receiver is located in the taxable territory Location of service receiver Rule 9Specified servicesLocation of service provider Rule 10Service of transportation of goods Place of destination of goods For GTA – Location of person liable to pay tax Rule 11Passenger transportation services Place where passenger embarks Rule 12Services provided on board conveyance First scheduled point of departure January 2013

Amendment to the Point of Taxation Rules, January 2013

Amendment to the Point of Taxation Rules, 2011 Slide 26 Recurring service also treated as ‘Continuous supply of services’ ‘Date of payment’ is the earlier of the dates on which the payment is - - Entered in the books of accounts; or - Credited in the bank account of the person liable to pay tax Point of taxation to be ascertained by way of best judgment, where the assessee is unable to submit the details regarding the date of payment or date of invoice or both Relevance of section 67A January 2013

Amendment to the Point of Taxation Rules, 2011 Slide 27 Applicable service tax rates under different circumstances: Date of Provision of Service Date of Invoice Date of Payment Point of TaxationApplicable Rate Before 31 March 2012 After 31 March 2012 Date of issue of invoice or date of payment, whichever is earlier 12% Before 31 March 2012 After 31 March 2012 Date of issue of invoice10% Before 31 March 2012 After 31 March 2012 Before 31 March 2012 Date of payment10% After 31 March 2012 Before 31 March 2012 After 31 March 2012 Date of payment12% After 31 March 2012 Before 31 March 2012 Date of issue of invoice or date of payment, whichever is earlier 10% After 31 March 2012 Before 31 March 2012 Date of issue of invoice12% January 2013

Other relevant changes 28 January 2013

Other relevant changes 29 Limitation period for issuing a Show Cause Notice extended from 12 months to 18 months. New combined return EST 1 for excise duty and service tax proposed. Time period for issue of invoice: - 30 days from the date of provision of service days from date of provision of service, for services provided by banking and financial institutions. January 2013

Some Key Aspects 30 January 2013

Some Key Aspects Slide 31 Employer – employee relationship Valuation of taxable services where consideration is received partly in non- monetary terms Valuation of barter services Taxability of liquidated damages Service provider and service recipient for place of provision of services Place of provision of services which are ancillary to the provision of another service in the ordinary course of business Pure reimbursements of expenses by Indian subsidiary in respect of expenses incurred by overseas group company Out of pocket expenses Impact of non- fulfillment of any of the export conditions under Rule 6A of the Service Tax Rules e.g. payment is not received in convertible foreign exchange January 2013

Some Key Aspects Slide 32 Bundling of services in case of hotels/ telecom Whether PLC is bundled service along with construction service Taxability of development rights Should Completion Certificate (‘CC’) be considered at par with Occupancy Certificate (‘OC’) Surrender or transfer of flats before the CC Taxability of medicinal products containing alcohol Remittance of foreign currency in India January 2013

Thank You

Declared Service– Works Contract Works Contract (for the purpose of carrying out) construction, erection, commissioning, installation, completion, fitting out repair, renovation, alteration of any movable or immovable property any other similar activity in relation to such property 34 January 2013

Specified Services Slide 35 The place of provision of services of following services shall be location of the service provider :- -Services provided by a banking company, or a financial institution, or a non- banking financial company, to account holders; -Online information and database access or retrieval services; -Intermediary services; -Service consisting of hiring of means of transport, upto a period of one month. January 2013

Section 67A – Date of determination of rate of tax, value of taxable service and rate of exchange Slide 36 The rate of service tax, value of taxable service and rate of exchange, if any, shall be rate of service tax or value of a taxable service or rate of exchange, as the case may be, in force or as applicable at the time when the taxable service has been provided or agreed to be provided -Explanation – For the purposes of this section, “rate of exchange” means the rate of exchange referred to in the Explanation to section 14 of the Customs Act, 1962 January 2013